China's Urbanization: Basic Trend, Strategic Options and Priorities

2009-12-07

By Hou Yongzhi & Liu Peilin, Research Team on "Study on Strategies and Policy for Urbanization with Chinese Characteristics", the DRC

Research Report No 131, 2009

I. Basic Trend of China's Future Urbanization

1. China's urbanization, which has been rising one percentage point annually over three decades, will continue to advance at fairly fast speed in the next decade

There are two reasons. (1) The Chinese economy will continue to grow at a relatively high speed in the next decade. In 2008, China's per capita GDP was about 3,260 dollars, close to the threshold value of the upper middle-income countries. It will join the ranks of the upper middle-income countries around 2010. After joining their ranks, its economic growth will somewhat slow down if compared with the previous three decades, though still at a relatively high level. The expansion of the economic size and the development of the nonagricultural industries in the urban areas will inevitably provide the peasants with more opportunities to find employment in the nonagricultural sectors and to settle down in the urban areas. Accordingly, urbanization will continue to move ahead in step with economic growth. (2) The numerous rural population and the limited arable land resources constitute a powerful inherent impetus to urbanization. In 2008, China still had 720 million rural residents, who possessed a total arable land of about 1.8 billion mu, or less than 3 mu per person. To achieve rural modernization and to enable the rural residents to lead a modern civilized life, the only way is to move them to the urban areas. And the peasants themselves also have a strong desire to seek living and development opportunities in the urban areas.

2. China's urbanization will continue to develop rapidly from 12th Five-Year Plan period to 2020 but speed will be slower than in past decade, and accordingly urban population swelling will also be slower than in past decade.

This will be determined by the following three factors. First, China as a whole will continue to maintain a relatively high economic growth rate and there will continue to be a relatively strong impetus to the urban-rural and inter-regional flow of population. Next, China's economic growth rate will be lower than in the past decade. Third, the cost of urbanization will continue to rise and constitute a constraint to the rise of the urbanization rate.

We can use the logistic curve, which is generally used by the academic community, to forecast the trend of China's future urbanization rate. This forecast has the following basic hypotheses. (1) The peak level of the urbanization rate is determined by the diverse conditions of each economy. (2) The urbanization rate of each economy demonstrates an S-shaped track as the time goes by. It will experience roughly three stages. The first is a stage of slow rise, the second is a stage of rapid rise, and the third is again a stage of slow rise, approaching the peak value. In making the forecast, we also presume that the existing statistical parameters for urban population will remain unchanged.

For the sake of forecasting, we first of all need to set the peak value for China's urbanization rate. International experience and theoretical analysis all indicate that to most countries, their urbanization rates cannot reach 100% and will reach a balance at a specific level, namely its peak value. There are several reasons. First, there are always some production activities (such as farming and mining) that cannot be centralized. Second, when production activities are too centralized, their efficiency will go down and they will become detrimental to environmental protection. Third, with the changes in the development stages and the living standards and with the improvement in the communication and transport conditions, decentralized residence can become a way to improve living conditions and the quality of life. For this reason, a de-urbanization phenomenon featuring a decline in the proportion of urban population can appear at a certain development stage. Of course, because different countries have different resources and environment and different population sizes, their urbanization rates will be different when they reach their peak values.

For example, the historical experience of the 24 high-income OECD countries indicates that the change in the urbanization rate was relatively small in the past three decades for Luxemburg, Finland, Belgium, Germany, Austria, Greece, Sweden and Britain. Their urbanization rates in 2005 were respectively 82.8%, 61.1%, 97.2%, 75.2%, 66%, 59%, 84.2% and 89.7%. The lowest was 59% for Greece and the highest was 97.2% for Belgium. Germany had the largest population of more than 80 million, and Finland has the smallest of more than 5 million. To China, Germany and Britain are more meaningful, with their urbanization rates in 2005 being respectively 75.2% and 89.7%.

Furthermore, the experience of the developed countries indicates that the rise in a country's urbanization rate can be generally regarded as a rise in the level of its modernization and an increase of its population enjoying modern civilized life before its urbanization rate reaches the peak value. But after the urbanization rate reaches the peak value, the change in the urbanization rate can no longer be used as an indicator to reflect the level of modernization and the living standard of the urban residents. Naturally, China's current urbanization rate is still insufficient and we still have to take a higher urbanization rate as the main task of urbanization for a considerable time to come.

The peak value of China's urbanization rate is also affected by diverse factors. While some factors can make the peak value higher than the general international level, others can make the peak value lower. On the one hand, China's scarce land resources and sharp man-land contradiction could make its peak value higher than the international level. On the other, China has the largest population in the world and requires a huge grain supply. To ensure food security, the country must meet its grain demand mainly through domestic production. For this reason, even if China continues to increase land and capital inputs, the labor intensity of its agricultural production will be higher than the international level. This determines that the proportion of China's population engaged in agricultural production will be higher than the average level of the developed countries. In the long run, the agricultural population can eventually enjoy the modern way of living as the urban residents do. In addition, as China's population size is extremely large, the total size of its urban population will also be much larger than the ordinary countries when they have the same urbanization rates, and the cost of population concentration in the urban areas will also be higher than the ordinary countries. Because of this factor, the advent of the point of dynamic equilibrium between China's urban and rural populations will be earlier than the countries which have smaller populations. Taking all these factors into account, we believe that a conservative estimation will put the peak value of China's urbanization rate at 75%~80% and a higher estimation will put the value at 80%~85%. Therefore, if we use five peak values of 100%, 85%, 80%, 75% and 70% to forecast the logistic equation for China's urbanization. As its urbanization rate cannot reach 100%, this scenario is used only for reference. In the remaining four scenarios, the peak value of 80% is used as the base scenario.